Basis of Presentation

The accounting policies we follow as of

January 1, 2019

are set forth in the notes to our audited consolidated financial statements in the Annual Report on Form

-K for the year ended

December 31, 2018

filed with the SEC on

March 15, 2019.

Such policies have been continued without change, except as noted herein, due to the change in lease accounting adopted. All material items included in those notes have

not

changed except as a result of normal transactions in the interim, or as disclosed within this report. The accompanying interim condensed consolidated financial statements have

not

been audited by our independent registered public accountants, and in the opinion of management, reflect all adjustments necessary for a fair presentation of the financial position and results of operations. Any and all adjustments are of a normal and recurring nature. Although management believes the unaudited interim related disclosures in these condensed consolidated financial statements are adequate to make the information presented

not

misleading, certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations and the cash flows for the

three

and

nine

month periods ended

September 30, 2019

are

not

necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated audited financial statements and the notes thereto included in our Annual Report on Form

-K for the year ended

December 31, 2018

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications had

effect on our previously reported results of operations.

Consolidation Principles

The terms “Abraxas,” “Abraxas Petroleum,” “we,” “us,” “our” or the “Company” refer to Abraxas Petroleum Corporation and all of its subsidiaries, including Raven Drilling, LLC (“Raven Drilling”).

Rig Accounting

In accordance with SEC Regulation S-

income is recognized in connection with contractual drilling services performed in connection with properties in which we or our affiliates hold an ownership, or other economic interest. Any income

not

recognized as a result of this limitation is credited to the full cost pool and recognized through lower amortization as reserves are produced.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Adopted Lease Accounting Standard

February 2016,

an accounting standards update was issued that requires an entity to recognize a right-of-use (“ROU”) asset and lease liability for certain leases. Classification of leases as either a finance or operating lease determines the recognition, measurement and presentation of expenses. This accounting standards update also requires certain quantitative and qualitative disclosures about leasing arrangements.

The new standard was effective in the

first

quarter of

2019

and we adopted the new standard using a modified retrospective approach, with the date of initial application on

January 1, 2019.

Consequently, upon transition, we recognized an ROU asset (or operating lease right-of-use asset) and a lease liability with

retained earnings impact. We applied the following practical expedients as provided in the standards update which provide elections to:

●

Not

apply the recognition requirements to short-term leases (a lease that at commencement date has a lease term of

months or less);

●

Not

reassess whether a contract contains a lease, lease classification and initial direct costs; and

●

Not

reassess certain land easements in existence prior to

January 1, 2019.

The impact of adoption of this new standard on our balance sheet was as follows:

	January 1, 2019
Operating lease ROU asset	$	687
Operating lease liability - current	$	(108	)
Operating lease liability - long-term	$	(579	)

Leases acquired to explore for or use minerals, oil or natural gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained, are

not

within the scope of the standards update. For more information, see Note

Stock-Based Compensation and Option Plans

Stock Options

We currently utilize a standard option-pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees and directors.

The following table summarizes our stock-based compensation expense related to stock options for the periods presented:

Three Months Ended				Nine Months Ended
September 30,				September 30,
2019		2018		2019		2018
$	76	$	327	$	301	$	1,241

The following table summarizes our stock option activity for the

nine

months ended

September 30, 2019

	Number of Shares			Weighted Average Option Exercise Price Per Share		Weighted Average Grant Date Fair Value Per Share
Outstanding, December 31, 2018		7,549		$	2.37	$	1.68
Granted		—			—		—
Exercised		(469	)	$	0.98	$	0.68
Forfeited		(589	)	$	3.02	$	2.14
Outstanding, September 30, 2019		6,491		$	2.41	$	1.71

As of

September 30, 2019

, there was approximately

$0.3

million of unamortized compensation expense related to outstanding stock options that will be recognized from

2019

through

2022.

Restricted Stock Awards

Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the recipient of the award terminates employment with us prior to the lapse of the restrictions. The fair value of such stock was determined using the closing price on the grant date and compensation expense is recorded over the applicable vesting periods.

The following table summarizes our restricted stock activity for the

nine

months ended

September 30, 2019

	Number of Shares (thousands)			Weighted Average Grant Date Fair Value Per Share
Unvested, December 31, 2018		827		$	2.15
Granted		1,315		$	1.34
Vested/Released		(228	)	$	2.22
Forfeited		(52	)	$	1.65
Unvested, September 30, 2019		1,862		$	1.58

The following table summarizes our stock-based compensation expense related to restricted stock for the periods presented:

Three Months Ended				Nine Months Ended
September 30,				September 30,
2019		2018		2019		2018
$	273	$	26	$	694	$	494

As of

September 30, 2019

, there was approximately

$2.2

million of unamortized compensation expense relating to outstanding restricted shares that will be recognized from

2019

through

2022.

Performance Based Restricted Stock

We issue performance-based shares of restricted stock to certain officers and employees under the Abraxas Petroleum Corporation Amended and Restated

2005

Employee Long-Term Equity Incentive Plan. The shares will vest in

three

years from the grant date upon the achievement of performance goals based on our Total Shareholder Return (“TSR”) as compared to a peer group of companies. The number of shares which would vest depends upon the rank of our TSR as compared to the peer group at the end of the

three

-year vesting period and can range from

zero

percent of the initial grant up to

200%

of the initial grant.

The table below provides a summary of Performance Based Restricted Stock as of the date indicated:

	Number of Shares (thousands)			Weighted Average Grant Date Fair Value Per Share
Unvested, December 31, 2018		405		$	2.37
Granted		803		$	1.34
Vested/Released		—		$	-
Forfeited		(43	)	$	1.57
Unvested, September 30, 2019		1,165		$	1.69

Compensation expense associated with the performance based restricted stock is based on the grant date fair value of a single share as determined using a Monte Carlo Simulation model which utilizes a stochastic process to create a range of potential future outcomes given a variety of inputs. As the Compensation Committee intends to settle the performance based restricted stock awards with shares of our common stock, the awards are accounted for as equity awards and the expense is calculated on the grant date assuming a

100%

target payout and amortized over the life of the awards.

The following table summarizes our stock-based compensation expense related to performance based restricted stock for the periods presented:

Three Months Ended				Nine Months Ended
September 30,				September 30,
2019		2018		2019		2018
$	155	$	75	$	403	$	159

As of

September 30, 2019

, there was approximately

$1.3

million of unamortized compensation expense relating to outstanding performance based restricted shares that will be recognized from

2019

through

2022.

Oil and Gas Properties

We follow the full cost method of accounting for oil and gas properties. Under this method, all direct costs and certain indirect costs associated with the acquisition of properties and successful as well as unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized oil and gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method based on proved reserves. Net capitalized costs of oil and gas properties, less related deferred taxes, are limited by country, to the lower of unamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on unescalated prices discounted at

10%,

plus the cost of properties

not

being amortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any, less related income taxes. Costs in excess of the present value of estimated net revenue from proved reserves discounted at

10%

are charged to proved property impairment expense.

gain or loss is recognized upon sale or disposition of oil and gas properties for full cost accounting companies with proceeds accounted for as an adjustment of capitalized cost. An exception to this rule occurs when the adjustment to the full cost pool results in a significant alteration of the relationship between capitalized cost and proved reserves. We apply the full cost ceiling test on a quarterly basis on the date of the latest balance sheet presented. At

September 30, 2019

and

2018

, our net capitalized costs of oil and gas properties did

not

exceed the cost ceiling of our estimated proved reserves.

May 2019,

we closed on the sale of our non-operated assets in the Bakken. Proceeds from the sale of approximately

$15.8

million were used to reduce outstanding indebtedness under our credit facility. In accordance with full cost accounting rules, the sale was

not

deemed to be significant; therefore,

gain or loss was recorded and the proceeds were credited to the full cost pool.

Assets Held for Sale

September 30, 2019,

we entered into contracts to divest of its remaining South Texas assets and

two

non-operated properties in Reeves County Texas. These assets are presented separately as “

Assets held for sale"

in the consolidated balance sheet at

September

30,

2019.

Assets held for sale were measured at the lower of their carrying amount or estimated fair value less costs to sell. The amount allocated to assets held for sale were recorded as a reduction to the full cost pool. The transactions, with combined proceeds of

$7.9

million, closed on

October 18, 2019

and

November 1, 2019,

respectively. See Note

10.,

Subsequent Events.

Restoration, Removal and Environmental Liabilities

We are subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and

may

require us to remove or mitigate the environmental effects of the disposal or release of petroleum substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have

future economic benefit are expensed.

Liabilities for expenditures of a non-capital nature are recorded when environmental assessments and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component is fixed or reliably determinable.

We account for future site restoration obligations based on the guidance of ASC

410

which addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. ASC

410

requires that the fair value of a liability for an asset's retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. For all periods presented, we have included estimated future costs of abandonment and dismantlement in our full cost amortization base and amortize these costs as a component of our depletion expense in the accompanying condensed consolidated financial statements.

The following table summarizes our future site restoration obligation transactions for the

nine

months ended

September 30, 2019

and the year ended

December 31, 2018

	September 30, 2019			December 31, 2018
Beginning future site restoration obligation	$	7,492		$	8,775
New wells placed on production and other		80			612
Deletions related to property disposals and plugging costs		(945	)		(2,270	)
Accretion expense		330			516
Revisions and other		486			(141	)
Ending future site restoration obligation	$	7,443		$	7,492